• Investment Taxation

Vanguard Lowers Their Fees…Again

The race to the bottom continues as Vanguard Canada recently lowered the fees on 11 of their ETFs. The cost that investors will pay to construct a balanced portfolio of Vanguard ETFs is now just 0.13% (the same cost as a similar portfolio from iShares, and slightly cheaper than one from BMO). iShares and BMO have also taken action to improve the tax-efficiency of their international equity ETFs by holding the underlying securities directly, while Vanguard continues to use a less tax-efficient “wrap” structure (choosing to hold US-domiciled ETFs instead). This structure leads to an additional layer of non-recoverable foreign withholding tax (for more information, please refer to our white paper, Foreign Withholding Taxes).

In the chart below, I’ve constructed balanced portfolios from the three companies and estimated their total costs (including foreign withholding taxes). The costs have been calculated separately for RRSP/TFSA accounts and taxable accounts. The results indicate that the iShares portfolio is still slightly cheaper in both cases by about 0.04%, although I would call this a draw. Canadian investors will be paying low costs no matter which plain-vanilla ETF they choose.

Estimated Total Cost of a Balanced ETF Portfolio*

Security MER FWT Level I FWT Level II Total Cost
Total Cost
Vanguard Canadian Aggregate Bond Index ETF (VAB) 0.14% 0.14% 0.14%
Vanguard FTSE Canada All Cap Index ETF (VCN) 0.06% 0.06% 0.06%
Vanguard S&P 500 ETF (VFV) 0.09% 0.29% 0.38% 0.09%
Vanguard FTSE Developed ex North America Index ETF (VDU) 0.23% 0.18% 0.39% 0.80% 0.41%
Weighted Average Cost 0.13% 0.30% 0.17%
BMO Aggregate Bond Index ETF (ZAG) 0.23% 0.23% 0.23%
BMO S&P/TSX Capped Composite Index ETF (ZCN) 0.06% 0.06% 0.06%
BMO S&P 500 Index ETF (ZSP) 0.11% 0.30% 0.41% 0.11%
BMO MSCI EAFE Index ETF (ZEA) 0.23% 0.33% 0.56% 0.23%
Weighted Average Cost 0.17% 0.30% 0.17%
iShares Core High Quality Canadian Bond Index ETF (XQB) 0.14% 0.14% 0.14%
iShares Core S&P/TSX Capped Composite Index ETF (XIC) 0.06% 0.06% 0.06%
iShares Core S&P 500 Index ETF (XUS) 0.11% 0.29% 0.40% 0.11%
iShares Core MSCI EAFE IMI Index ETF (XEF) 0.23% 0.33% 0.55% 0.23%
Weighted Average Cost 0.13% 0.26% 0.13%

*Balanced ETF Portfolio is comprised of 40% Canadian bonds, 20% Canadian stocks, 20% U.S. stocks and 20% international stocks.

Sources:  BlackRock, BMO ETFs, TD Mutual Funds, Vanguard


Index Expense Ratio (US) Index Dividend Yield Level I Tax Rate Level II Tax Rate
Vanguard S&P 500 ETF (VFV) 0.05% 2.00% 15.00%
BMO S&P 500 Index ETF (VSP) 2.00% 15.00%
iShares Core S&P 500 Index ETF (XUS) 0.07% 2.00% 15.00%
Vanguard FTSE Developed ex North America Index ETF (VDU) 0.09% 2.90% 6.4%1 15.00%
BMO MSCI EAFE Index ETF (ZEA) 3.10% 10.9%2
iShares Core MSCI EAFE IMI Index ETF (XEF) 3.00% 10.9%2

1The 2013 annual foreign withholding tax rate paid by the Vanguard FTSE Developed Markets ETF (VEA)

2The 2013 annual foreign withholding tax rate paid by the TD International Index Fund e-Series (TDB911)

By |2017-01-17T15:03:29+00:00October 10th, 2014|Categories: Investment Taxation|Tags: |6 Comments


  1. P August 11, 2015 at 12:20 am - Reply

    Tks for your openness in blog, which could save DIY investors’ tons of time to calculate and compare. I can easily pick the lowest cost ETF across the issuers.

    And did you issue new FWT white paper, I only can find this 2014 version.

    Some data need to be updated, e.g. XEF’s FWT change, and some ETFs have lower MER.
    Look forward to the new version.

    Except the MER and FWT, any other cost we should consider? And about tracking error, how to measure it properly, how it influence ETF selection?tks!

    • Justin August 11, 2015 at 10:40 am - Reply

      @P – I have not issued a new white paper with the changes yet. I may wait until XEF has a full year of foreign withholding taxes on which to base the estimate on.

      Other costs to consider – trading costs (TER), foreign currency conversion costs, behavioural costs, taxes, etc. Please see Vanguard’s article on tracking error: http://www.vanguard.com/jumppage/international/web/pdfs/INTUTE.pdf

  2. Pd March 31, 2015 at 7:16 pm - Reply

    Hi justin. Would not vfv held in an rrsp be exempt from wh tax under the treaty? Thanks. Paul

    • Justin March 31, 2015 at 7:24 pm - Reply

      @Paul – unfortunately not. As an alternative, the underlying US-listed ETF held by VFV (VOO) could be used to avoid the 15% withholding tax on the dividends in an RRSP.

  3. gsp November 4, 2014 at 6:55 am - Reply

    Great job as always Justin. Your level of precision in calculating these costs is impressive.

    It’ll be interesting to see what XEF/ZEA’s actual MERs and foreign withholding are once they’ve directly held securities for over a year.

    Enjoying the new blog.

    • Justin November 4, 2014 at 8:02 am - Reply

      @gsp – I’m glad you’re enjoying the blog. Dan and I will definitely be updating our “Foreign Withholding Tax” white paper each year (perhaps we’ll use the actual 1-year data when we do), so that investors will eventually have a better estimate of the benefits of XEF/ZEA relative to an ETF like VDU.

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